A Guide to Controlled Foreign Corporation Regulations

Multinational companies have unique tax situations, and one of the sets of rules that they are required to follow is Controlled Foreign Corporation regulations. A Controlled Foreign Corporation (CFC) is any foreign company that has 50% or more of its stock owned by American shareholders. The CFC laws directly impact the taxes of any foreign corporations doing business here.

Controlled Foreign Corporation Regulations

Every country has a different approach to CFC rules, and the regulations in the United States were initially created in 1960 and have undergone major modifications since then. Before the laws were in place, the regulations were supportive of private investment overseas and allowed multinational companies to invest heavily abroad. The basic structure of CFC rules includes:

• Determining shareholder breakdown
• Determining if the income has already been taxed at a minimum level by a foreign country
• Determining which types of income will be taxed according to the rules

Understanding Your Obligation

In the United States, Controlled Foreign Corporation regulations define a shareholder as someone who holds 10% or more of the vote or value of a foreign company. A company is considered a CFC if over 50% of the vote or value is controlled by American shareholders. Next, the rules determine whether or not your income should be taxed in the US. Any Subpart F income must be included in your gross income calculation, and it will be taxed with the appropriate income tax rate. Subpart F income can include things like insurance income, foreign base company income and income derived from any foreign country.

Most income that is impacted by Controlled Foreign Corporation regulations is passive income. The IRS is most concerned with income derived from low-tax jurisdictions and potential tax shelters. After the Tax Cuts and Jobs Act of 2017, the tax base of US multinational companies was broadened, so taxation is more complex and more aggressive when targeting CFCs that they believe are shifting profits or attempting to avoid paying taxes. The rules are complex, and you should work with an experienced tax preparation and accounting company when completing your taxes.

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